Salary Components: Structure & Tactics to become more Tax Efficient!

A salary structure consists of several components which can help one reduce tax burden. Here are some components that can be used by an employee to minimise tax burden. These needs to be stated in Form 12BA before 31st May, to the employer to claim them optimally during the year. For more details, contact your HR/CA on how to avail, implement them and start saving money.

Basic: This is mandatory CTC Component. The New Wage Code Bill, 2019 has mandated, with effect from 01.04.2021, that Basic should at least be 50% of CTC and has recommended to 60% of CTC. This will result in cumulative impact on practically, almost all of the other salary components, including Statutory Contributions and Deductions such as PF & ESIC.

House rent allowance (HRA): This is the most common CTC component. Those staying in rented accommodation can avail of an exemption against the HRA received and only the balance will be taxable. The exemption is limited to the lowest among:

• Rent paid less 10% of salary*
• 50% of salary* if the house is situated in Delhi, Mumbai, Kolkata or Chennai OR 40% of salary* in case of Other cities
• Actual HRA received

*Salary means basic salary and dearness allowance.

If your CTC doesn’t contain HRA, deduction for rent paid is available from gross taxable income, subject to various limits (maximum deduction Rs 5,000 per month). If you live in a house you own, the HRA component is fully taxable. However, You can claim benefit of Interest payment on Self Occupied under House Property Head, which is subsequently adjusted from Salary Head, reducing your tax liability, substantially.

Work from home expense Allowance: If you are working from home full-time and your employer is reimbursing certain expenses such as telephone, internet, petrol/fuel, printing and stationery expenses you need not pay tax on these reimbursements. You may need to provide the requisite bills to the employer for claiming these reimbursements, as per the corporate policy. While computers and laptops provided by employers do not give rise to any taxable perquisite, provision of any other asset say a swivel chair, computer desk or printer, would be taxed as a perquisite as per Rule 3 (7) (vii) in the hands of the employee, at the rate of 10% of the original cost of the asset as reduced by any charges recovered from the employee.

Leave travel concession (LTC): LTC exemption is allowed on two domestic journeys taken in a block of four years. The new block commenced on January 1, 2018 (Calendar Years 2018-2021 followed by new block on 2022-2025). Restrictions apply. For example, if you are travelling by air, it is limited to economy class airfare for the shortest route to your destination. No exemption is available for hotel and local conveyance expenses.

Leave encashment: If you haven’t availed of your entitled leave, you may have an option to get it encashed – your employer may permit this only on retirement or resignation. The maximum aggregate exemption available in a lifetime is 3 lakh.

Employee Provident Fund (EPF): PF withdrawal after five or more years in continuous service in continuous service is tax free. However, interest earned on accumulated balance in PF account post end of employee’s contribution to PF on or after 1 April 2021 exceeds Rs 2.5 lakh in any year, Interest on contribution above Rs 2 .5 lakh shall be taxable on withdrawal. Usually, PF Contribution is 12% of Basic for both employer as well as employee's contribution culminating to 24% of Basic. However, a restricted Basic of Rs 1,800/- (On Cap of Basic Salary of Rs 15k @ 12%) can also be availed. This applies for both, Employer & Employee's contribution and can lead to increase in in-hand salary with higher income tax impact.

Employee State Insurance Corporation (ESIC): This is applicable for employees whose total salary does not exceed Rs 21,000/- in a month. ESIC, like PF has Employers' Share @ 3.25% and Employees' share @ 0.75% of the total monthly salary. This does not impacts TDS, largely, because all employees covered in this segment, does not cross the tax threshold limit under Income Tax Laws. This, however, leads to lower in-hand salary.

Gratuity: Gratuity received under the Payment of Gratuity Act after completion of 5 years of continuous service is eligible for exemption of up to Rs 20 lakh. But remember, the exemption is the cumulative of all gratuity payments received by an individual in his/her lifetime. Once availed, can't be availed again beyond Rs 20 Lakhs.

So, has The New Wage Code Bill increased or decreased your in hand salary from April, 2021?

Comment and let me know!